As noted by Assiduous Reader FletcherLynd, The Toronto-Dominion Bank has announced:
a domestic public offering of Non-Cumulative 5-Year Rate Reset Preferred Shares (non-viability contingent capital (NVCC)), Series 20 (the “Series 20 Shares”).
TD has entered into an agreement with a group of underwriters led by TD Securities Inc. to issue, on a bought deal basis, 10 million Series 20 Shares at a price of $25.00 per share to raise gross proceeds of $250 million. TD has also granted the underwriters an option to purchase, on the same terms, up to an additional 2 million Series 20 Shares. This option is exercisable in whole or in part by the underwriters at any time up to two business days prior to closing.
The Series 20 Shares will yield 4.75% annually, with dividends payable quarterly, as and when declared by the Board of Directors of TD, for the initial period ending October 31, 2023. Thereafter, the dividend rate will reset every five years at a level of 2.59% over the then five-year Government of Canada bond yield.
Subject to regulatory approval, on October 31, 2023 and on October 31 every 5 years thereafter, TD may redeem the Series 20 Shares, in whole or in part, at $25.00 per share. Subject to TD’s right of redemption and certain other conditions, holders of the Series 20 Shares will have the right to convert their shares into Non-Cumulative Floating Rate Preferred Shares (NVCC), Series 21 (the “Series 21 Shares”), on October 31, 2023, and on October 31 every five years thereafter. Holders of the Series 21 Shares will be entitled to receive quarterly floating rate dividends, as and when declared by the Board of Directors of TD, equal to the three-month Government of Canada Treasury Bill yield plus 2.59%.
The expected closing date is September 13, 2018. TD will make an application to list the Series 20 Shares as of the closing date on the Toronto Stock Exchange. The net proceeds of the offering will be used for general corporate purposes.
They later announced:
that as a result of strong investor demand for its previously announced domestic public offering of Non-Cumulative 5-Year Rate Reset Preferred Shares (non-viability contingent capital (NVCC)), Series 20 (the “Series 20 Shares”), the size of the offering has been increased to 16 million Series 20 Shares. The gross proceeds of the offering will now be $400 million. The offering will be underwritten by a group of underwriters led by TD Securities Inc.
The expected closing date is September 13, 2018. TD will make an application to list the Series 20 Shares as of the closing date on the Toronto Stock Exchange. The net proceeds of the offering will be used for general corporate purposes.
The new issue is quite expensive according to Implied Volatility Analysis:
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According to this analysis, the fair value of the new issue on September 4 is 24.38.
The ludicrously high figure of Implied Volatility is something I take to mean that the underlying assumption of the Black-Scholes model, that of no directionality of prices, is not accepted by the market; the market seems to be taking the view that since things seem rosy now, they will always be rosy and everything will trade near par in the future.
I balk at ascribing a 100% probability to the ‘all issues will be called, or at least exhibit price stability’ hypothesis. There may still be a few old geezers amongst the Assiduous Readers of this blog who can still (faintly) remember the Great Bear Market of 2014-16, in which quite a few similar assumptions made earlier turned out to be slightly inaccurate. The extra cushion implied by an Issue Reset Spread that is well over the market spread is worth something, even if nothing gets called.
Or, to put it another way, one can buy a whole lot of downside protection for very little extra money, relative to this issue. For instance, TD.PF.E, FixedReset, 3.70%+287, is bid at 24.92 (theoretical fair value of 25.06, according to the above analysis, which ignores the interim dividend shortfall). You’re giving up about $0.25 p.a. in dividends until it resets 2020-10-31, sure, but you’re getting a significant amount of protection in the event of a market downturn, and a bit more dividend afterwards. Is it worth it? Well, that will depend a lot on your aversion to loss … I’m just saying that buying the same amount of protection costs more in most other series of FixedResets.